Ajay Wadhwa, an India Entry Strategist and lawyer with a rich experience in Corporate & Transactional Laws and Legal Compliance deconstructs the Companies Act 2013 to explain exactly what it entails and addresses, and the implications thereof. 

Mid-size, high-growth companies, and their promoters, directors and key managerial personnel (KMP) know that legal compliance is a worthy investment for them. Not only does proper and timely legal compliance enable a promoter, director or a KMP to concentrate  on growth, a compliant company is also preferred by investors, collaborators and banks. Needless to state, an excellent corporate image of a legally compliant entity is an additional bonus. 

In India, the Companies Act, 1956 is one of the primary legislations applicable on companies functioning in India. The position under the current Companies Act, 1956, is quite liberal vis-à-vis various compliances, as most of the offences are compoundable in nature. However, this position is set to change very soon, as the new Companies Act, 2013, as and when notified fully, provides for prohibitive penalties and/or jail terms for certain erstwhile compoundable offences. In fact, 98 sections of the new Act have already become applicable from September 12, 2013.

The new Act contains provisions on very many issues which had been unaddressed till now. Further, the penalties have been made quite strict with heavy monetary fines, and even imprisonment in certain cases. In fact, the phrase “prevention is better than cure” is more than ever relevant now. Let’s go through some of the important provisions.

Key Managerial Personnel: Under the new Act, the term “Key Managerial Personnel” has been defined to include CFO, CEO, Company Secretary and other such officers. The KMP is now also covered under the definition of “Officer in default”. A KMP may now therefore, be liable for penalties and/or imprisonment, as the case may be, for various defaults under the new Act of 2013.

Resident Director: In terms of Section 149(3) of the new Act, every company shall have at least one Director who has stayed in India for a total period of not less than 182 days in the previous calendar year. Private companies, especially those having only two non-resident Directors, such as Indian subsidiaries of foreign companies will be most affected by this provision. Such companies should now seriously start looking for suitable candidates to be inducted as resident director as and when this provision is notified. 

Frequency of Board Meeting: In terms of Section 173(1) of the new Act, a company shall hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than 120 days shall intervene between two consecutive meetings of the Board. This means that under the new Act, all Board Meetings will have to be properly planned so that the time interval between two Board Meetings does not exceed 120 days.

Resident Director: In terms of Section 149(3) of the new Act, every company shall have at least one Director who has stayed in India for a total period of not less than 182 days in the previous calendar year. Private companies, especially those having only two non-resident Directors, such as Indian subsidiaries of foreign companies will be most affected by this provision. Such companies should now seriously start looking for suitable candidates to be inducted as resident director as and when this provision is notified. 

Notice of Board Meeting: In terms of Section 173(3) of the new Act, a meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. Until now, the Board Meetings were normally being conducted without any specific time based requirement of notice, so even a few hours’ notice would be sufficient. This is now set to change under the new Act.

Board meeting through video conferencing: In terms of Section 173(2) of the new Act, a Board Meeting can be held through video conferencing, however every director of a company shall attend, at least one Board Meeting in a financial year of the company, in person. Moreover, the following matters cannot be dealt with through video conferencing or by a circular resolution—approval of the annual financial statements and approval of the Board’s report. 

Interested Director will not be counted for the purpose of quorum: In terms of Section 184(2) of the new Act, every director of a company who is, directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into with a related entity, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed. Further, the interested director shall not participate in such a meeting. This provision may create problems for companies having a small Board, of say two directors. How the business, where one of the said two directors is interested (for instance, pertaining to fixation/enhancement of salary of one of the directors), will be conducted, is a question which requires to be answered, and would require structuring of such Boards.

Board Meeting details will be filed to Registrar of Companies (ROC): Details of holding number of Board Meetings, total number of directors on the date of meeting and attendance of the directors in each meeting will have to be filed with ROC via annual filling documents i.e. Board Report and Annual Return. 

Disclosure pertaining to associate, holding and subsidiary companies required: Even when it comes to reporting, the newly prescribed form of Annual Return requires much more detail. Now, information on associate companies which exercise influence because they have 20 per cent or more share capital, or control business decision by way of an agreement, holding and subsidiary will also be required to be disclosed.

Secretarial standards are proposed to be made mandatory: The secretarial standards as may be issued by the Institute of Company Secretaries of India (ICSI) from time to time, are proposed to be made mandatorily applicable under the new Act of 2013. This would mean that the compliance officer of the company would now have to work extra-hard to ensure that all the secretarial standards issued by the ICSI are complied with, in letter as well as in spirit. Alternatively, the outside counsel will have to spend additional time in understanding and applying these Secretarial Standards to keep the companies being advised by them, above board at all times, thereby increasing the cost of legal compliance.

Rule bases Statute: The new Act of 2013 is primarily a rule based statute, where most of the sections have to be read together with the prescribed rules. Each chapter has separate rules, which are to be fully understood, for the purpose of applying them properly. Further, the rules may undergo frequent changes from time to time, so it would be imperative for the Legal Counsel of a company to keep himself abreast of these changes, in order to keep the company fully compliant from time to time. 

Substantial increase in the punishments and penalties: Under the new Act of 2013, the penalties and punishment for non-compliance have been increased substantially. For instance, default made in filling of specific resolutions with ROC, where the current Act of 1956 provides for a penalty of Rs200 per day till the default continues, the new Act of 2013 provides penalty of not less than Rs5,00,000 but which may extend to Rs25,00,000. Further, any default made in relation to issue of duplicate share certificates, failure to pay dividend within the prescribed period etc. have now been made non-compoundable with a jail term. This trend indicates that the intent of the legislature is to make the companies fully compliant with the provisions thereof, and deal with any act of non-compliance very harshly. Some of the said instances entailing strict penalties are detailed here under: 

Tampering with the minutes of the proceeding of the company: Any person, who is in default, shall be liable to imprisonment of up to two  years, and fine which may be extended up to Rs100,000. 

Offences involving fraud: The offence covered under fraud are very wide in nature including but not limited to wrongful gain, wrongful loss and misuse of any position etc. Any person, who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to 10 years, and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. There are number of provisions under the new enactment, which attract a punishment equivalent to punishment for fraud.

Punishment for false statement: Any person who makes a statement which is false in any material particular, knowing it to be false or omission to disclose a fact, knowing it to be material, in relation to any return, report, certificate, financial statement, prospectus statement, or other document required by the provisions of this Act or rules made there under, shall be liable to a punishment equivalent to punishment for fraud.